Solvency Analysis The following information is available from the balance sheets at the ends of the two most recent years and the income statement for the most recent year of Impact Company:

December 31 2010 2009 Accounts payable $ 65,000 $ 50,000 Accrued liabilities 25,000 35,000 Taxes payable 60,000 45,000 Short-term notes payable 0 75,000 Bonds payable due within next year 200,000 200,000 Total current liabilities $ 350,000 $ 405,000 Bonds payable $ 600,000 $ 800,000 Common stock, $10 par $1,000,000 $1,000,000 Retained earnings 650,000 500,000 Total stockholders’ equity $1,650,000 $1,500,000 Total liabilities and stockholders’ equity $2,600,000 $2,705,000 2010 Sales revenue $1,600,000 Cost of goods sold 950,000 Gross profi t $ 650,000 Selling and administrative expense 300,000 Operating income $ 350,000 Interest expense 89,000 Income before tax $ 261,000 Income tax expense 111,000 Net income $ 150,000.

Other Information

a. Short-term notes payable represents a 12-month loan that matured in November 2010. Interest of 12% was paid at maturity.

b. One million dollars of serial bonds had been issued ten years earlier. The fi rst series of $200,000 matured at the end of 2010, with interest of 8% payable annually.

c. Cash fl ow from operations was $185,000 in 2010. The amounts of interest and taxes paid during 2010 were $89,000 and $96,000, respectively.
Required 1. Compute the following for Impact Company:

a. The debt-to-equity ratio at December 31, 2010, and December 31, 2009

b. The times interest earned ratio for 2010

c. The debt service coverage ratio for 2010 2. Comment on Impact’s solvency at the end of 2010. Do the times interest earned ratio and the debt service coverage ratio differ in their indication of Impact’s ability to pay its debts? Explain.AppendixLO1